robust decisions in uncertain times

Five key lessons for boards from the Carillion collapse

The sudden collapse of a business like Carillion has raised questions about financial reporting controls, auditor vigilance and exactly who should have acted sooner. The government is embarrassed by exposure to public infrastructure projects across several departments, while many smaller sub contractors will never be paid for work they’ve done. The board of Carillion must bear much of the blame so what could they have done to avert this crisis?

Accept collective responsibility – Boards are made up a experienced directors selected on merit to deliver commercial success in the form of profit and shareholder dividend. The executive members operate the business on a day-to-day basis, while the non-executive members offer balance and wider perspective tasked with holding the executive to account on behalf of the shareholders. Together both groups collectively share responsibility for the business model, its strategy and risks. it is not acceptable to blame the Finance Director or auditors alone, the board is a culpable entity.

Separate governance from management – Distinction is often hazy but it is worth quoting from the British Standard for Effective Governance of Organizations (BS 13500): ‘Management is about getting work done, whereas governance is about ensuring that the right purpose is pursued in the right way and that the organisation continuously develops overall.’ A board should know if suppliers are being paid late or that bill payments are being made with credit: a cash-flow problem demands attention, not as an emollient to shareholders, but to address inherent structural problems.

Respond to warning signs – Some are obvious but not all: a rapid turnover of chair or FD is pretty obvious and demands question, but so too does hedge fund activity in shorting your share price. If professional investors are betting on your share price collapsing in the future what information do they have that you don’t? Boards can suffer from optimism bias and ‘groupthink’ and justify ‘inside knowledge’ for why they know better, but these viewpoints can prove to be delusional. Responsible directors ask probing questions even at the risk of making others around the table uncomfortable.

Challenge experts – Just because the Head of Risk says that risk is being managed it doesn’t mean he’s right. Risk is not a concept that all directors understand equally and that is a good thing. Perspective is a valuable tool in risk appreciation, especially as once recognised controls for handling it can be pretty straightforward. The same goes for assertions from the FD, Head of Internal Audit or indeed Head of Sales. Future business is never certain until the cash is in the bank. This is something Enron learnt to its cost. Even Tesco now understands that external auditors can be wrong also.

Prevent the death spiral – This can be quite fast and consists of five stages: it starts with shares being sold in volume forcing the price down and reducing market capitalisation. Lenders get nervous and refuse further loans so the cost of borrowing increases. Ratings agencies downgrade your stock and cash flow stalls, this is the liquidity crisis often known as the Wall. Death can be averted through cash injections but white knights are scarce, the fifth and final stage is administration. Boards need to prevent this death spiral through listening to investors not just their own executive team.

There is an ominous sixth lesson for boards as well: avoid performing so poorly as to attract the attention of a Commons select committee. MPs will ask probing questions you should have had the temerity to ask, a press and wider public will be amazed at your lack of scrutiny. In order to take ‘robust decisions in uncertain times’ collective leadership must be competent and capable.

Written by Garry Honey, founder of Better Boards, CEO, Chiron Reputation Risk and SAMI Associate. The views expressed are those of the author and not necessarily of SAMI Consulting.